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A new solution to tackle the old problem of missing 401(k)s

Despite differences big and small, all retirement plan sponsors experience at least one common problem: the seemingly intractable incidence of participants who have left behind small accounts in the plans sponsored by their former employers and failed to update their address when they subsequently change residence, a.k.a. missing participants.

The twin issues of missing participants and small accounts have been amplified by today’s highly mobile workforce, the widespread adoption of auto-enrollment and the fact that participants frequently forget to update their contact details with employers and plan record-keepers. These trends have been the norm for some time, but the problem of missing participants has taken on a new sense of urgency in light of widespread reports that the Department of Labor is focusing heavily on missing participants when auditing plan sponsors and record-keepers.

Fortunately, there is a fresh solution emerging that will help sponsors locate missing participants, and its potential is found in the systems of the record-keepers that sponsors already use to administer their plans. According to new research from Boston Research Technologies, current, reliable addresses for up to two-thirds (67%) of terminated/inactive accounts can be found by matching active account records against terminated/inactive records across record-keeping systems; we call the solution “auto-locate.”

The technology at the heart of auto-locate creates links between record-keeping systems, which establishes a “virtual database” of all participant records — an untapped resource for locating the bulk of missing participants. The underlying technology is also fully automated, highly secure and in service today.

In July 2017, a large plan sponsor in the health services industry implemented auto-portability, resulting in the industry’s first fully automated, end-to-end transfer of retirement savings from a safe harbor IRA into a participant’s active account. Auto-portability incorporates a “locate” function that searches electronic records of participants, and identifies multiple accounts that could belong to the same individual, and a “match” algorithm to confirm that these accounts actually belong to the same participant. Auto-portability has been live for nearly eight months and has resulted in more than 3,700 successful instances of locate and match.

The locate and match functionality can be unbundled from auto-portability to create an automated, scalable solution for locating current addresses for missing-participant accounts. And while auto-locate won’t find 100% of missing-participant accounts, as a standalone application the technology can go a long way toward resolving a significant chunk of the missing participant problem in a cost-effective way. The critical success factor for reaching these milestones is widespread record-keeper participation in the auto-locate network.

Additional measures to reduce missing participants

Plan sponsors can also adopt additional proactive measures that will reduce the incidence of missing participants. One such measure would be to implement a robust, high-touch roll-in service, using their record-keeper or engaging an independent roll-in service provider. Another is to adopt auto-portability, a solution that will ensure that the smallest accounts are preserved for their intended use in retirement by proactively moving them to their current-employer plan when a participant terminates. Finally, plan sponsors should consider amping up their communication to terminated participants with messaging that discourages premature cash-outs of retirement savings.

The persistent nature of the missing participant problem calls to mind a popular definition of insanity: “keep doing the same thing over and over, and expect a different result.” It’s time to try a fresh, promising solution that leverages an untapped resource — existing participant data — and requires the cooperation of the service provider community. Although the creation of a system-wide utility has not yet come to fruition, plan sponsors should urge their record-keepers to take the initiative, and work with them to ultimately provide a new, higher standard of care for locating missing participants.

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